What can you legally tell your competitors when your suppliers aren’t listening?

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European Union fined three battery recycling companies a combined 43.5 million euro for forming a cartel that artificially kept the purchasing price for used car batteries low in February this year. A fourth company was not fined because it received immunity after revealing the existence of the cartel. Most cartel activity penalised by the Commission and indeed by the Norwegian Competition Authority (the “NCA”) involves cartel members colluding to increase their sales prices. This case was therefore unusual, as the companies conspired to reduce their purchase prices.
Tuesday, April 4, 2017

Authors: Associate Heidi Magnussen and Partner | Lawyer Thomas Sando

The companies’ goal was to lower the price paid to scrap dealers and collectors for used car batteries. They did this by exchanging information on the prices these suppliers offered, agreed on target prices, maximum prices and volumes to buy from suppliers. By coordinating to lower the prices they paid for scrap batteries the companies disrupted the normal function of the market and prevented competition on price.

The Commission found that the basic aim in this case was the same as in any cartel - collusion to maximize profits. The way in which this was done was, however, different from a traditional sales cartel.

The enforcement of purchasing cartels - not normally regarded as serious as sales cartels

The word cartel is for many associated with illegal cooperation. More often than not the objective of the cartel is to make higher profits by colluding instead of competing. As mentioned above, such collusion can either affect the price the participants obtain from their customers or the price the cartel participants pay to their suppliers. The latter has traditionally not been considered as severe as the former.

Purchasing cartels were in fact not prohibited by the Competition Act 1993. The preparatory works of the Act made it clear that for purchasing cartels it would not be appropriate to impose a presumption of anti-competitiveness in the same way as for sales cartels. The prohibitions against price-fixing, market sharing and bid rigging where therefore only applicable to “sales”.

This relates to the fact that purchasing cartels often have advantages that are not applicable to sales cartels. Purchasing cartels are often organized openly and the supplier is aware that he in reality is negotiating with a group of buyers (as opposed to sales cartels which for obvious reasons regularly are kept secret, and where customers therefore get the illusion that the prices demanded are stipulated as a result of competition). Purchasing cartels increase the buyers’ bargaining power, and as long as there is competition on the downstream market, the savings achieved through collusion will benefit the end consumers (as opposed to sales cartels that contribute to higher prices). Further, it will normally represent a saving for the supplier to negotiate with only one customer rather than a number of individual customers. It is therefore natural that purchasing cartels are treated less strictly than sales cartels, and are not normally considered to have an anti-competitive Object.

In Norwegian law collusion between competitors is today regulated by section 10 of the Competition Act which prohibits agreements which have as their object or effect the prevention, restriction or distortion of competition. The prohibition in section 10 is widely defined and in principle covers all agreements (formal or informal) entered into between competing undertakings, regardless of whether such agreement relates to purchasing or selling.

The difference between legal and illegal procurement collusion

The boundary between legal and illegal cartel behavior is not clear cut and will always depend on a specific assessment of the circumstances in each case.

In assessing whether a purchasing cartel is covered by the prohibition in section 10, the competition authorities will have regard to whether the collusion has an anti-competitive object or whether it has an anti-competitive effect on the market. Agreements between competitors which entails price fixing and market sharing are typical examples of “object infringements” and will always be covered by the prohibition. This will typically be agreements which in reality do not only regulate the parties’ common procurement of goods, but is also a set-up created to camouflage harmful cartel behavior.

This was the case in the car battery recycling cartel – the four recycling companies that took part in the cartel colluded to reduce the purchase price paid to scrap dealers and collectors for used car batteries. In particular, the companies exchanged information and agreed on target prices, maximum prices and procurement volumes. This behavior was intended to lower the value of used batteries sold for scrap, to the detriment of used battery sellers. The companies affected by the cartel were mainly small and medium-sized battery collectors and scrap dealers. According to the Commission the parties were well aware of the illegal character of their contacts and sometimes tried to disguise them by using coded language. On this basis the Commission found that the basic aim of the cartel was the same as in a traditional sales cartel – to avoid competition to maximize profits.

If the agreement does not contain object infringements such as price fixing or market sharing, the competition authority will assess whether the agreement has the effect of restricting competition. Purchasing cartels will rarely have an effect on competition if there is effective competition on the downstream/resale market, i.e. because if there is effective competition in the downstream market it is more likely that the reduced prices obtained in the procurement market will be passed on to the end consumers through lower resale prices.

Market power is also a relevant factor when assessing the effects cartel activity may have on competition. Collusion on procurement may increase the buyers’ bargaining power towards large suppliers. Through joint volumes smaller buyers may achieve better terms on procurements that are comparable to that achieved by larger competitors. Procurement collusion between smaller competitors can therefore sometimes have the effect of increasing competition in the market by making smaller competitors better able to compete against the larger providers. On the other hand, if the parties have substantial market power on the purchasing market they can squeeze the conditions under competitive levels with the result that smaller quantities are produced compared to a situation with effective competition.

According to NCA guidelines, it is unlikely that market power will exist when the parties have a combined share of the relevant market below 15%. If the parties’ combined market share exceeds 15%, a closer assessment of other relevant market conditions is required. It is safe to say, however, that joint procurement in a concentrated market where the participants have well over 15% market share, is likely to be caught by the prohibition.

As seen from the above, there is no absolute limit for when a purchasing cartel will fall outside the section 10 prohibition. Therefore, if you are considering entering into an agreement or arrangement with a competitor for the procurement of certain goods or services, it is always wise to obtain specialist legal advice before doing so. Such advice should preferably be obtained at a very early stage of the negotiations as the exchange of pricing information or other sensitive information may form the basis for establishing a violation of section 10 per se, especially if such information is shared between close competitors.

 

 

 

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